Technology Strikes Deep Oil Supplies

Americans, and people the world over, are increasing their usage of oil and gas. And yet the scare headlines of yesteryear, about oil shortages and price increases, are nowhere to be seen.

Imported oil is up this year to 55% of U.S. consumption, from 46% five years ago. Yet world oil prices are lower than they were last year, and the U.S. Energy Department’s outlook is for several years of stable prices.

The only prices rising are the stock prices of companies in oil and oil services--the firms that own drilling rigs or provide technical services to help find and produce oil and gas. Big names in oil services--Schlumberger, Halliburton, Dresser Industries, Baker-Hughes--along with lesser-known companies such as BJ Services, Pride International and Camco International, are selling at premiums in the stock market.

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An atmospheric change is evident in the oil business, although major environmental and financial tensions remain. “Companies that only yesterday saw a bleak future of declining reserves are now confidently predicting increases in production extending years into the next century,” says Albert Anton Jr., partner in Carl H. Pforzheimer & Co., a Wall Sreet investment firm specializing in petroleum issues.

Texaco, for example, foresees 9% a year increases in production; Shell foresees 15% a year.

Technology has made all the difference. The development of three-dimensional seismic pictures of subsurface hydrocarbon deposits and of submersible pumps that can bring more oil out of old wells have transformed the industry. Exploration for oil pays off far more surely than it once did. That’s one reason exploration budgets are going up--Exxon’s by 15% a year, from more than $9 billion to $11 billion in a couple of years.

And the capability to drill to unprecedented depths in the Gulf of Mexico and other bodies of water, along with the industry’s ability to liquefy asphalt-like oil deposits of Venezuela, western Canada and perhaps Australia, are also adding to the world’s supply.

“Increased oil production from Venezuela, from the Athabasca tar sands of Canada and from Rundle oil shale in Australia will shift the center of world oil,” predicts Joseph Tovey, of Tovey & Co., a New York investment bank specializing in oil and gas. The upshot: no oil shortages foreseen.

But is the current optimism real or illusory? Can the world’s nations, including newly industrializing giants like China and India, really use more oil without despoiling the environment and dangerously heating the earth’s atmosphere?

And can oil and oil-service stocks live up to expectations this time after 15 years of repeated disappointments in an industry bedeviled by fluctuating oil prices and political uncertainty around the world?

Take the second question first. The stock prices are justified if the current expansion is more soundly based than past flurries of enthusiasm. The oil business fell apart in the early 1980s when oil and gas prices fell; 4,500 drilling rigs and many other properties became relatively worthless.

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Today is different. The number of working drill rigs fell to 600 two years ago and is at 850 today, facing greatly increased demand for services, says Mark Siegel, chairman of UTI Energy, an 82-rig, $100-million drilling company. Rig rental rates are going up 15% a year--to $6,500 a day for a conventional land rig, $120,000 a day for semi-submersible drill ships in the Gulf of Mexico or the South China Sea.

Demand for energy is increasing--3% a year on a worldwide basis, growing sharply in China, which doesn’t yet use much oil, and growing 4% to 5% a year in the United States, which uses a great deal.

But energy supplies also are increasing. Venezuela, a longtime oil producer and founder of the Organization of Petroleum Exporting Countries (OPEC), produces only a third as much oil as Saudi Arabia at present. But Venezuela has reserves of more than 300 billion barrels, equal to those of Saudi Arabia. And the state oil company, Petroleos de Venezuela (PdV), has decided to invite foreign companies to help it develop those vast reserves.

The Conoco division of DuPont will start drilling next month in a partnership with PdV. Arco and Texaco are in another partnership with the state company. And when Venezuela recently threw lease partnerships up for auction, the world’s oil companies rushed in with $2 billion in bids.

“More than $20 billion is being invested in Venezuela for projects that will begin production over the next decade,” says analyst George Gaspar of Robert W. Baird & Co., a Milwaukee brokerage. As a result, Venezuela will double its annual oil output.

Something else is different. Oil companies once owned the resources of other countries, developed them and paid a tax to the host governments. Tensions exploded in the 1970s. Companies were expelled and national governments took over control of resources.

Now the governments are inviting the companies back as partners, most of all because the companies possess the technology of efficient development, production and distribution of oil and gas.

Exxon, for example, has developed a process for converting natural gas to a liquid inexpensively, thus opening vast gas reserves in Indonesia, Malaysia and the Middle Eastern state of Qatar for easy and economical shipment. Exxon is a partner with state companies in all three countries.

Partnerships make the oil business less vulnerable to the revolutions that have disrupted the oil industry--and oil consuming nations--over recent decades. And an industry increasingly based on brainpower is less vulnerable to price fluctuations or to having its assets seized.

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Oil companies have changed too. Major oil companies have slimmed down, farming out many tasks to smaller companies. At the same time, smaller companies have bulked up through acquisitions in various specialties, so that Varco International, an Orange-based supplier of equipment for drill rigs, has trebled in revenues since 1992 to more than $500 million this year.

Baker-Hughes, which transferred headquarters from Orange to Houston, has grown by acquisition to $3.5 billion in revenues, and Smith International, also a transfer to Houston from Orange County, has grown to $1.8 billion in revenues.

A cloud remains. Six years ago, Daniel Yergin closed his award-winning history of oil, “The Prize,” by looking ahead to the conflict between energy usage and the environment. Now that conflict is upon us in restrictions on energy due to be proposed at an international conference on global warming this December.

The industry is fighting the proposals, but changes seem inevitable in the coming years. However, it’s also inevitable that an industry that devised ways to drill 8,000 feet in the Gulf of Mexico and make Venezuela’s sludgy oil useful will adapt to the new environment too.

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Deepened Dependency

U.S. reliance on “foreign oil” has grown steadily but also has become a less fearful term as oil output has increased in many parts of the world. In millions of barrels per day:

U.S. crude oil production: 1998 estimate -- 6.19

Net imports (including Strategic Petroleum Reserve. Note: 1997 and 1998 figures are estimates.): 1998 estimate -- 8.00

* Source: Department of Energy